Consumer benefit from FTTH Development and Its Regional
Characteristics: A Revealed Preference Approach
Yuki HiranoResearcher, Institute for Information and Communications Policy ※Keisuke Takachi

Senior Researcher, Institute for Information and Communications Policy

Masanori Kondo Director of Policy Research Department, Institute for Information and Communications
PolicyTokio Otsuka

Visiting Researcher, Global Information and Telecommunications Institute, Waseda
University; Special Researcher, Institute for Information and Communications Policy

Hitoshi Mitomo

Professor, Graduate School of Global Information and Telecommunication Studies,
Waseda University; Special Researcher, Institute for Information and Communications
Policy1. Introduction
In the current situation of Japanese telecommunications business fields, the service of Fiber to the Home(FTTH) is becoming so widespread throughout Japan that we need to keep up with the trend of FTTH. The area
providing the FTTH service is spreading by degrees. Considering the price of FTTH, the cost including the setting thecommunication line to the home was very expensive previously, but now the monthly charge is becoming cheaper thanbefore. One of the most noteworthy features of FTTH is the ability of the high-speed and stable telecommunications
and the provision of the comfortable environment for the usage of Internet, which is better than the othercommunication line. In the NTT’s midterm business strategies in November 2004, they announced to the public thatthey planed to increase 30 million users of FTTH by 2010 year. Many Japanese telecommunications carriers areencouraged to universally prevail the FTTH service.
We focuses on the above mentioned FTTH service and evaluate a consumer benefit of FTTH using themethod of the economical analysis in this paper. For this purpose, we break down FTTH service into two parts,
namely infrastructure part and application part. The method is the Revealed Preference Method which utilizes the real
data of consumers, in other words, the consumer behaviors from the questionnaire results. In addition, we conduct thecost benefit analysis compared with the previous study which uses the Stated Preference Method (Takachi et al.[1]).
Moreover, we categorize each area of the whole Japan into five different types and compare the consumer benefits of
FTTH service based on the each characteristic of areas
2. WTP for infrastructure part of FTTH
To calculate the WTP (Willingness To Pay) for infrastructure part of FTTH as a consumer benefit, we use theConditional Logit Model1 which is regarding a condition that the personal availability for the communication lines for
the Internet usage, because the communication lines a person can choose differs from region to region. The utility
function of consumer is the linear sum of the main effect of each attribute as the following mathematical formula.

Vij = α 0Cost j + α1 z1 j + α 2 z2 j + α 3 z3 j + α 4 z4 j + α 5 z5 j1

The detail of Conditional Logit Model is referred to Kuriyama[3].

(1)Vij ：The utility function of Consumer i in the case of choosing the internet service j (FTTH, CATV, xDSL,ISDN, Dialup)

Cost j ：Monthly Charge (yen)z1 j ：Speed of communication line (kbps)
z2 j ：Dummy variable for the availability of FTTH service
z3 j ：Dummy variable for the availability of CATV service
z4 j ：Dummy variable for the availability of xDSL service
z5 j ：Dummy variable for the availability of ISDN service

α 0 〜α 5 ：Parameters for the variables shown above
The data used in this paper is the following questionnaire result. We write down the data that consists ofcategory of communication line the respondent is using, speed of communication line (kbps), monthly charge (yen) andpersonal data (sex, age and revenue) as the main descriptive statistics in the Table 1.
【Overview of the Questionnaire】
・Date:

From February 20, 2006 to March 6, 2006

・Method:

Internet questionnaire・Respondents:

Internet users in Japan・Counts of res:1,000 people (200 people in each part of five region types. Refer to Appendix 1)

Table 1. Main Descriptive Statistics of the Questionnaire Results

SexAgeRevenueOccupation

Residence
CategoryofCommunication line
Monthly Charge
SpeedofCommunication line
Length of the Usage

Results
Male: 692 people (69%), Female: 308 people (31%)
Average: 44 age, Standard deviation: 11 age, Maximum: 67 age, Minimum: 22 age
Average: 6,430 thousand yen, Standard deviation: 4,470 thousand yen, Maximum: 60 million yen,
Minimum: 500 thousand yen
Clerks or Researchers 22%, Physical Labors 12%, Sales or Service representative 10%, Managers 10%,Experts (Doctors or Lawyers etc.) 7%, Self-employed workers 9%, Agriculture, Forestry or Fisheries 1%,
Student 1%, Housekeeper 16%, inoccupation 8%, Miscellaneous 4%
Each region type (Urban areas, Lowland cities, Lowland suburbs, Highland cities, Highland suburbs) isdivided into 200 people
FTTH 25%, CATV 13%, DSL 56%, ISDN 4%, Dialup 2%
Average: 4,495 yen, Standard deviation: 1,926 yen, Maximum: 35,000 yen, Minimum: 488 yen
Average: 44,640 kbps (45Mbps), Standard deviation:120,054 kbps, Maximum: 1,000,000 kbps, Minimum: 1kbps
Average: 33 months (2 years and 9 months), Standard deviation: 11 months, Maximum: 156 months,Minimum: 0 month

The utility of the FTTH infrastructure in this paper is the only utility of consumers who gain the network
environment of high speed and constant connection and receive a comfort of the ordinary Internet service such asbrowsing Web site and e-mail. It is not contained the usage of the application service of FTTH, that is IP telephony inthis section. The other utility of CATV or xDSLs is the same consumer utility as that of FTTH. The options of thecommunication lines for explained variables are FTTH, CATV, xDSL, ISDN and Dialup2. The explaining variables
are the dummy variable for the availability of each communication line, monthly charge and speed.
Table 2 shows the estimation result of the parameters of the utility function for each communication line3.
According this result, we estimated that the WTP for infrastructure part of FTTH service is 5,198 yen per month. We
also estimated that the WTP for infrastructure part of xDSL service is 5,628 yen, which is the most expensive, that ofCATV service is 4,863 yen and that of ISDN service is 2,304 yen.
Table 2.

Estimation Result of the parameters

Sample1,000

Log-likelihood function (intercept only)-1395.383

Log-likelihood function (with predictors)-825.0472

Likelihood ratio index (McFadden’s R )Parameters

0.409

Value

Standardt-value

P-value

WTP（yen）

Error

Monthly Charge（yen）-0.0006271***0.0000600-10.4470.0000−Speed of Communication line（kbps）

0.0000078***0.0000022

3.511

0.0004¥0.0125

Dummy variable of FTTH service

3.260***

0.331

9.862

0.0000¥5,198Dummy variable of CATV service

3.050***

0.280

10.8890.0000¥4,863

Dummy variable of xDSL service

3.529***

0.259

13.6340.0000¥5,628Dummy variable of ISDN service

1.445***

0.313

4.616

0.0000¥2,304***P<0.001、**P<0.01、*P<0.05

3.

WTP for application part of FTTH
In this section, we analyze the WTP for the application part for which we can apply additionally and comparewith the WTP derived from SP method. The present application services of FTTH are TV channels service and IP
telephony service in Japan. In the questionnaire, the TV service is divided into two services, terrestrial digital TVservice and satellite TV service.
The respondents answered the questionnaire by means of filling in the price as they want to pay for theapplication. Table 3 shows that the average WTP for the each application of the RP data by the above method and theSP data in the previous study. This results shows the total of the WTPs derived from the SP data is much more
expensive than that of the RP data. This indicates that the higher willingness to pay for the application of FTTH
service than we expected, especially for TV service.

2Since we do not gain the related data of the option the respondents do not choose in the questionnaire results, average valuesof the sample is the alternative data as the same Ida et al.[2] in this paper.
3
We use the econometrical analysis software, Limdep Ver.8.0 for the estimate.

Table 3. WTP for application part of FTTH by the RP and SP data
Application
Terrestrial TV channels
Satellite TV channels
IP telephony
Sum of the above

RP data
¥871
¥936
¥526
¥2,333SP data¥959¥1,187¥1,598¥3,744

4. Cost Benefit Analysis
We initially compute the consumer surplus of FTTH service to conduct the cost benefit analysis. Theconsumer surplus is estimated by choice probability as Crandall et al.[4] that estimated for broadband services. Since
the each benefit for the application services is different, we consider the choice availability is simulated in the following
cases4:(1) All TV channels (Terrestrial and Satellite TV channels) and IP telephony are available on FTTH
(2) Satellite TV channels and IP telephony are available on FTTH
(3) Only IP telephony is available on FTTH
(4) No application is available on FTTH
Note that the additional charge is needed to use the application of FTTH. We also set out the following framework of
the cost benefit analysis.
【Framework of the cost benefit analysis】
・Monthly charge of FTTH service

5,000 yen・Depreciation life of optical fiber cable20 years5

・Depreciation life of transmission equipment

6 years

・Maintenance and management cost

10% of the initial investment cost・Social discount rate

4%

For the maintain cost of FTTH, we use the total cost estimated by Takachi et al.[5]. Figure 1 shows that theaccumulative benefit and the cost from reference year by RP method. It will take 8 years in case of (1), 10 years incase of (2) and 17 years in case of (3) before the total consumer surplus exceeds the total cost. In case of (4), the total
consumer surplus will not exceed the total cost within 20 years. As a result, we believe that TV service has a great
impact on spreading the FTTH service in Japan.

4

In case of adding the applications of FTTH, the utility function is added to the dummy variables of each application whichparameter is the WTP derived form RP data in Table 3.
5According to the report, the depreciation life of aerial fiber-optic cable is 15.1 years and that of transmission equipment is 6years.

Figure 1.

The accumulative benefit and the cost from reference year by RP method
25,000Cost（billion）

20,00015,00010,0005,000
00

All TV + IP
Satellite TV + IP
Only IP telephony
No application
7,795
Cost

1361
357357
358
8,575

2

3456781,145 2,606 4,810 7,563 10,618 13,815 17,073
1,092 2,362 4,147 6,274 8,579 10,965 13,384
1,034 2,092 3,456 5,001 6,633 8,302 9,988997
1,930 3,074 4,334 5,647 6,984 8,329
9,354 10,134 10,914 11,693 12,473 15,171 15,950

910

20,356 23,649
15,818 18,258
11,680 13,375
9,679 11,031
16,730 17,509

5. Geographic Analysis
We categorize each area in Japan into five different types, which are urban areas, lowland cities, lowland
suburbs, highland cities and highland suburbs. See Appendix 1 for details. Table 4 shows the estimation results ofeach area using the same method of section 2. While the WTP in highland suburbs is 6,961 yen which is the mostexpensive, the WTP in the lowland cities and suburbs is less expensive than that of in other areas.
Table 4.

WTPs of the five regional types

1. Urban Areas
2. Lowland cities
3. Lowland suburbs
4. Highland cities
5. Highland suburbs6
The whole area

FTTH
¥6,412¥3,352¥3,997¥5,268¥6,961¥5,198DSL¥6,390¥4,407¥3,745¥4,941¥8,657¥5,628CATV¥5,613¥4,085¥3,431¥4,476¥6,710¥4,863

6. Conclusion
In this paper, we tried to analyze the FTTH service as a means of spreading broadband network. The main
conclusions are following. We estimated that the WTP for infrastructure part of FTTH is 5,198 yen per month andthat for TV service of FTTH is 1,807 yen per month, which is the most expensive of all the application parts wecalculated. The results also showed that the WTP derived from Stated Preference (SP) method in the previous study ismore expensive than that of RP method.
Next, we conduct a cost benefit analysis for FTTH service and find that if a consumer can enjoy TV service
and IP telephone service through FTTH, it will take 8 years before the total consumer surplus exceeds the total cost.
In addition, the results are different from whether we are available for specific application or not. These results are
6Since we could not estimate the WTP for ”5. Highland suburbs” is not a significant value, we calculate the average value ofthe each area is equal to that of the whole area.

consistent with the previous studies.
Finally, we compare the benefits of FTTH service based on the characteristics of areas. We categorize eacharea into five different types and find the WTPs in highland areas are higher than that of lowland areas. It may be
because other broadband services (e.g. xDSL) can be reached relatively easily in lowland areas while those services arepractically impossible in highland areas.
Reference[1] Takachi, K., Otsuka T. and Mitomo, H., “A Cost Benefit Analysis of the Nationwide FTTH Development in Japan,”
Discussion Paper of Institute for Information and Communications Policy, April 2006.
[2] Ida, Takanori and Kuroda, Toshifumi,Japanese),

Discrete Choice Analysis of Demand for Broadband in Japan (inPress release of Ministry of Internal Affairs and Communications

Competitive Situation in the Telecommunications Business Fields,[3] Kuriyama, Koichi,

FY2003 Evaluation ofJune. 2004.

Conjoint method using Excel Version 1.1,

Study Report of Environment Assessment

Forum, Dec. 2003.
[4] Crandall, R. W., “Broadband Communications,” in S. K. Majumdar, I. Vogelsang, M. E. Cave, eds., Handbook ofTelecommunications Economics vol.2, Amsterdam: Elsevier Science, 2005.
[5] Takachi, K. and Mitomo, H., “Estimating the Cost of Nationwide Optical Fiber Network Development in Japan - A
Step toward a Cost-Benefit Analysis of the Fiber-to-the-Home Initiative -,” 19th International Meeting of thePacific Regional Science Conference Organization of the RSAI, Nihon Univ., Tokyo, July 2005.
Appendix 1. Categorization of Geographical Conditions
From the data on roadside condition in FY1999 Survey of Traffic Conditions on Streets and Highways (TheRoad Traffic Census), Takachi and Mitomo categorized each of the nation’s 3,213 municipalities into five geographicalcategories as shown in the following table. The indexes used are calculated as follows: DID Index = DID Road
Lengths/Total Road Length; Urban Planning Index = Urban Planning Road Lengths/Total Road Length; Lowland
index = (DID Road Lengths + Other Urban Area Road Lengths + Lowland Road Lengths)/Total Road Length; andHighland Index = Highland Road Lengths/Total Road Length. DID roads are in areas with more than 5,000
inhabitants and abutted by dense populations per the national consensus (populations of more than 4,000 people persquare kilometer).
Category

Category Index Ranges

Assumed Geographical Characteristics

1. Urban Areas

DID Index of 0.5 or moreHigh percentage of densely populated areas

2. Lowland cities

Lowland Index of 0.8 or more
Urban Planning Index of 0.5 or more

Lowlands that are relatively developed

3. Lowland suburbs

Lowland Index of 0.8 or more

Lowlands that are not densely populated

4. Highland cities
5. Highland suburbs

Highland Index of 0.2 or more (and Lowland
Index of under 0.8)
Urban Planning Index of 0.5 or more
Highland Index of 0.2 or more (and Lowland
Index of under 0.8)

Highlands that are relatively developed
Highlands that are not densely populated